European Regulator Blocks Ryanair Bid for Aer Lingus

By STEPHEN CASTLE and NICOLA CLARK

Published: June 28, 2007

A bid by the low-cost airline Ryanair to buy Aer Lingus, Ireland's national carrier, was blocked Wednesday as the top European regulator showed a willingness to intervene despite the overturning of past merger prohibitions in court.

The European Commission's rejection of the deal prompted a robust reaction and the promise of a legal challenge from Ryanair's outspoken chief executive, Michael O'Leary, who accused Brussels of bowing to political pressure from the Irish government, which had opposed the deal.

In barring what would have been the first takeover of a national flag carrier by a low-cost rival, the European competition commissioner, Neelie Kroes, invoked her power to prohibit mergers for only the second time since taking office in 2004. The commission said the combination of the two Dublin-based airlines would have created a near-monopoly in the Irish market.

Competition lawyers argued that the commission was on relatively safe ground, having revised its procedures after a series of reverses in Europe's second-highest court, the Court of First Instance, in 2002.

''This is pretty much an open-and-shut case,'' said Catriona Hatton, a partner in the Brussels office of the law firm Hogan & Hartson. ''The only question was whether the remedies offered by Ryanair could have been sufficient to bring in a significant new competitor on the routes.''

In a rare departure, the executive body even commissioned an independent consultant to carry out a customer survey at the Dublin airport to track travelers' opinions.

Since taking office, Ms. Kroes has used her powers sparingly, though she did bar the merger of two Portuguese electricity and natural gas companies in 2004. Several other deals have been allowed to go ahead only under strict conditions.

But some merger plans have been called off when the parties involved decided that the deals risked being turned down by the commission.

To try to win approval for its bid of 1.48 billion euros ($1.99 billion), Ryanair had offered to lower the short-haul fares of Aer Lingus by 10 percent for one year and to sell airport slots for a new rival operating as many as six aircraft.

But the commission said a merger would have created a monopoly on 22 out of 35 routes in or out of Ireland. It argued that the number of slots Ryanair offered to give up would not have permitted a competitor to emerge, and that the price cut would be limited in duration and difficult to enforce.

Even without the commission's intervention, Ryanair would have struggled to complete the takeover. The airline has managed to amass only a 25 percent stake in Aer Lingus since it proposed the merger.

Ryanair promised to appeal to the Court of First Instance, saying in a statement that consumers would suffer from the rejection of the deal.

Aer Lingus, which was privatized in September, just days before Ryanair's hostile bid, welcomed the commission's decision.

''Air Lingus has said all along that the best way to serve the interests of consumers and our shareholders is for us to remain as an independent company,'' Dermot Mannion, the chief executive of Aer Lingus, said by telephone from Dublin.

Some had expected the commission to try to force Ryanair to sell its 25 percent stake in its rival, but Ms. Kroes said the regulator was ''not in a position to require Ryanair to divest its minority share.'' She also said that she was open to considering a revised offer from Ryanair, arguing that hers was not ''a never-ever decision.''

Mr. Mannion said he did not expect Ryanair's stake to represent a significant impediment to managing the company. ''There are almost no circumstances that I can conceive'' that would require Aer Lingus management to obtain approval from 75 percent or more of the voting shares, he said.

Photos: The European competition commissioner, Neelie Kroes, used her power to prohibit mergers, while Michael O'Leary, Ryanair's chief executive, accused her of bowing to political pressure from the Irish government. (Photograph by Francois Lenoir/Reuters); Ryanair offered 1.48 billion euros ($1.99 billion) for Aer Lingus, Ireland's national carrier, but Aer Lingus opposed its low-cost rival's maneuver. (Photograph by Paul O'Driscoll/Bloomberg News)